Demonetisation: A noble thought, but demonstrates government’s distrust in its citizens

December 20, 2016 § Leave a comment

An edited version was first published on Firstpost-


November 8th, 2016 will go down as one of those days which define an era in the annals of Indian history. Such moments usually tend to be planned confrontations, with  a crescendo slowly leading up to it, and while not always obvious at that time, it is heard later, and understood in hindsight. Kingdoms and rulers are defined by these moments, mostly on the battle field and sometimes off it.

The locus of today’s war is the Indian economy, and the Government of India has sounded the gongs and issued a battle cry against those evil-doers who have stashed away “black money.” Much like most wars since the World War era, civilians aren’t just inactive participants, they are collateral. Both sides have a free run on them, and whatever each does is in good-faith to their conscience and belief system.

So much has been done and said, and said and not-done- some true, some not so much the truth, and some outright lies and rumours, that to get a full sense of what’s happened and what’s happening is like trying to wrap your head around a religious text- as much as one’s personal morality and belief cry out aloud, one still has to adopt an arm’s distance and try to understand the logic and reason of the text, however convoluted and perverse.

To state the simple facts, without reducing to ad absurdum- the Prime Minister of the country announced that five hundred and thousand rupee notes will not be valid tender from the following day. People have been given fifty days to exchange, deposit, use it for a few things like petrol, tickets, etc.- basically to get rid of the old notes. The exchange is subject to limits, and deadline(s) have been set for using the old notes for certain transactions. A limit has also been set for ATM transactions and withdrawing cash from banks. People have been encouraged to adopt non-cash methods of transactions. We are still within the 50 day window.

The intention of demonetising 86% of the currency in circulation is to bring out the “black money.” The government has been quite vocal in taking on black money, and this isn’t the first move. When it comes to intentions, there is nothing to fault. In fact, it is laudable that they have the will to take on what’s almost become a characteristic of an Indian.

Black money tends to be of two types- money which is from an illegal activity and not reported to the taxation authorities, and that which is from a legal source but hasn’t been reported to the taxation authorities.

This money isn’t always necessarily in cash- it is also stashed away in tax havens – countries and businesses who are committed to the tenets of secrecy and believe that what they do not know isn’t their problem and you will not know when you don’t ask questions. The path to “justice” for this money is much harder and almost impossible, because of the complex structure of these transactions, and international laws, rules and diplomacy. Also, one usually doesn’t tend to prosecute oneself or the hand that feeds.

And then there is the black money that is in cash – ubiquities and an innate part of the Indian economy. This money is created, owned and used in transactions by almost everyone. It is not created just through bribes, capitation fees or land deals, but also is created by teachers, doctors, Chartered Accountants, lawyers, priests and other noble folks who take money and not pay taxes on the transaction. This money is then used in further transactions where it may or may not come back into the legal system. As such, the difficulty here lies in not just getting hold of the romanticised huge stashes of money, but also in bringing it to account in the hands of the person who hasn’t paid the taxes.  For legal transactions, we have a VAT system, TDS/TCS, etc.  which are aimed at this – to catch a transaction at its origin and bring it into the tax net. The GST regime which will soon be ushered in aims to build on and strengthen the existing system.

A key measure which the government seems to have identified is digitalisation and encouraging non-cash transactions. This is certainly the best way to eliminate the creation of black money- when the number of cash transactions reduce it becomes more and more difficult to hide illegal transactions and masquerade them as legal; that is, people cannot create black money, when everything has been brought to account and large cash transactions will draw suspicion.

This is where eliminating the higher denominations comes into play. It would mean that apart from transactions of small value, people would tend towards non-cash transactions. It would also mean that physically carrying and stashing away black money will become difficult, not just because of the weight and volume, but also because the actual value of currency in circulation will be lesser than what it will be with higher denominations in circulation.

Demonetisation means removing an object of its intrinsic value. It doesn’t necessarily mean new currency of the same denomination aren’t issued, it just means the old notes are retired. The idea behind the current demonetisation drive is to bring out the hidden 500s and 1000s and subject them to taxation. The idea here isn’t to eliminate higher denominations, as evident by the new 500s and 2000s, but more of a confession for old sins. There also seems to be a move towards reducing the currency in circulation, maybe even a possible demonetization of these new notes in the future as we head towards a more digitalised economy.

As stated earlier, the intention behind this move is excellent and noble. But what has happened is a mess of an execution. We see queues at banks and ATMs where people are forced to wait to withdraw their own money. Small businesses and traders have lost income, and are in a fix to make ends meet.

The government has carried out extensive advertisement campaigns and people aplenty have been quick to rubbish anyone questioning the move as anti-national (“With the growth of nationalism, man has become the greatest menace to man. – Tagore).

But beyond what at times sounds more propaganda than anything else, what we need to look at is the success of the move – this can be by the amount of BLACK MONEY brought out and future gains from it and also the move towards digitalisation.

it will take a long time to know the actual amount of black money brought out. Apart from stories of certain huge deposits, the actual money which has come out or has been destroyed will take a long time to emerge and might still be subject to a good degree of error.

Also, this move doesn’t eliminate the conversion of old black to new black or the creation of new black money. While the former shows how deep corruption is ingrained in our system, the latter is possible since we still have high denomination currencies. While the headlines of new black being caught would seem to show a higher efficacy in catching hold of perpetrators, it can simply be down to reporting bias and won’t become evident till we know the extent of the new rot.

The gain to the exchequer also needs to be considered. The direct gain here would be taxation imposed on the black money reported. Here again, this money would only be subject to direct tax and not indirect taxes which were also evaded. In fact, tracing the origin of the money and therefore the point of taxation might actually lead to better plugging the system and loopholes. It remains to be seen if this gain will outweigh the cost of the move.

The indirect gain would be the income in the future generated- the increase in money in banks should theoretically lead to a decrease in interest rates which in turn would lead to more borrowings and investments into the economy. In the long run, this should out do the loss to the economy due to the demonetisation. Again, it remains to be seen if this will happen.

Great impetus has been given to going Digital. The general awe of using cards to pay for everything in places like Singapore, is no more a distant dream, but almost a reality- how we wish.

Much like the Swachh Bharat drive (ironically the logo of this mission appears on the new currency notes – a haven for germs, dust and other such), saying and cess-ing doesn’t really solve the problem. For every railway station that beams at us, the fact remains that a hundred other places are as dirty as ever. Implementation is what matters, and for that we need two things, a) an infrastructure and b) education (different from merely disseminating information).

Quoting the number of bank accounts is a moot point. What matters is the number of digital transactions actually carried out as an overall percentage of transactions. What also matters is the available infrastructure and if it is enough to support (almost) everyone going digital overnight (if 86% of the cash is removed and only a small % added back, then clearly this is the intention and way out.)

Without going into servers and capacities, we have to look at the availability of POS machines and cards, net banking facilities, smart phones, phones (for UID),, etc. And beyond that, we need to look at if banks can receive requests, process and issue/digitally enable people overnight, especially when they are caught up in changing money and accepting deposits. The obvious answer seems to be in the negative, especially considering we still have villages without electricity, or proper banking infrastructure. While it can be argued that quite a sizeable quantum of legal transactions are non-cash anyway, what needs to be remembered is as a government it is equity that matters- the quantum doesn’t matter, but the number of transactions do. And what needs to be remembered is that we are talking about not just about illegal money, but access to legally earned, taxed money and transacting using it.

While anecdotal stories have been published to belie us into thinking that people have adopted digital technology overnight, the reality is far from it. Educating people goes beyond advertising and pushing matter- it involves teaching them how to register, use and transact using digital technology securely. As such there is much distrust in technology, especially when it comes to money, by quite a large portion of the population.

The government seems to have overestimated the influence of the Prime Minister and assumed it as enough motivation for people to believe and switch over. But the panic which followed the announcement and practical considerations like paying for food and rent and standing in queues to get money for these things didn’t really allow for much room for people to consider what was being said. So while being highly nationalistic and soldering along queues, people did not have time to learn and adopt. Maybe the government could have used the wait time to actively educate people using its highly motivated volunteers.

The difference between fortitude and balderdash masochism lies in choosing the moments you use to exhibit the underlying quality- to use a much too familiar example would be of Karna from Mahabharata who bore the pain of a creature digging into him while his guru slept- which as anyone would tell you led to him being cursed to forget all he knew at the moment of reckoning. The intention maybe right, but personality driven egotistic heroism is the also the start of a tragedy. All the suffering of civilians, and soldiers (to the convenience of those who bring them into conversation, can’t respond) is of nought when neither have you stopped the creation of illicit money nor have you caused a major shift towards cashless economy.

To be fair, corruption is too deep seated in us that you are asking people not just to adopt to a new system but to fundamentally kill a part of themselves. As much as a majority has elected this government on the strength a supposed maverick, it isn’t enough to inspire what would seem like hara-kiri. This especially so when the priest is corrupt and the believer is corrupt – the God too is corrupt and that’s what the people seem to be praying to anyway.

It would have been wiser to adopt a bottom-up approach and create the infrastructure first. Slowly prod people to move away from cash and allow the majority of the country which transacts in cash to get an idea of how it works. The demonetisation then would have made sense and could also have done anyway with the issue of new high denominations.

The ultimate aim is to always win a war, not merely a battle. It might seem unfair to judge an army based on a single battle, but some battles are more significant than others. This certainly is so. This round of the battle, with the advantage of surprise on the governments side and all that it had its disposal, including the implicit trust of many, is the government’s. But when almost all the (faceless) leaders of the enemy camp are intact, and many have lost trust which they had in the government what did the victory achieve?  It is possible to kill an elephant and deceive a person, but not an entire country, especially when the people you are supposedly fighting for are the collateral. And in a democracy, even if you honestly believe in what you said to be true, you better be ready to answer questions and not expect people to radically change their lives merely on your word.

Time will tell who wins the war. Nationalism stems from a feeling of oneness, and making people insecure – to think you can’t access a lifetime’s work(legally earned, tax paid) the way you want, isn’t going to inspire that, how many ever ladoos you distribute. Above all, this shows a lack of trust in your own citizens- to catch a few thieves, the entire nation is being asked to line-up. Who is going to identify them, remains a mystery.





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